Austerity Zeal Wears Thin in Finland as Spending Talks Begin

By Kati Pohjanpalo -
Mar 21, 2013

Commitment to austerity is showing
signs of waning in Finland, where a recession has prompted the
government to reconsider its fiscal targets.

Prime Minister Jyrki Katainen’s six-party coalition will
meet today in Helsinki to discuss a budget framework for the
next four years. The government will need to balance measures to
help reach its goals of halting debt growth and supporting a AAA
rating without hampering the economy.

“Economic outlook has weakened since last year,” Finance
Minister Jutta Urpilainen said to reporters today on her way to
the talks. “It’s important that the government be able to take
decisions, and I believe we’ll be able to decide on measures
that support economic growth and create jobs.”

Finland’s economy shrank last year as Europe’s debt crisis
deepened, hurting exports and eroding consumer confidence in the
northernmost euro nation. The country is now mired in its second
recession in four years, making the government’s budget goals
less attainable and adding to the cost of caring for Europe’s
fastest-aging population.

“The government has woken up to the fact that economic
growth won’t be as fast as assumed,” said Pasi Kuoppamaeki,
chief economist at Danske Bank A/S (DANSKE) in Helsinki.

The government targets ending debt growth by 2015 and
bringing the central government deficit to within 1 percent of
gross domestic product from last year’s 3.4 percent. Katainen
signaled on March 17 Finland may scrap the budget goal to avoid
excessive austerity in a bid to support the economy.

Foster Growth

The coalition will examine whether reaching the target “is
best done through as many spending cuts and tax increases as
possible or by ending debt growth and by taking measures that
foster growth,” Katainen said on March 17.

Labor unions and employers last night failed to reach an
agreement over a wage deal spanning most industries that the
government had asked for, according to statements by the
organizations.

“I would have hoped for a moderate labor market deal to
support the government’s fiscal policy,” Urpilainen said. “The
government still needs to make its own decisions.”

Corporate Tax

The nation faces pressure to lower company taxes from 24.5
percent after Sweden and Denmark both cut their rates to 22
percent. The Confederation of Finnish Industries, Finland’s main
employer organization whose members contribute more than 70
percent of national output, last month called for a 15 percent
corporate tax rate to create 100,000 new jobs.

“They’ll probably lower the corporate tax rate,”
Kuoppamaeki said. “Still, they probably won’t cut it to 15
percent. That would be too radical in this situation.”

Urpilainen, who heads the Social Democrats, signaled she
may now agree to cutting corporate taxes. Her party has
prioritized tax increases in previous fiscal policy decisions.

“Reducing company taxes, and in general easing taxation
with the aim of boosting growth and stimulating job creation,
will bring in more tax revenue over the long term,” she said.

Finland is the only euro-member with a stable AAA rating at
Standard & Poor’s, Moody’s Investors Service and Fitch Ratings.
Germany and Luxembourg have negative outlooks on their top
credit grades at Moody’s, and the Netherlands faces a downgrade
at all three companies.

Tax Reform

“These decisions are also key to keeping the credit rating
as high as possible,” Kuoppamaeki said. “Budget cuts are only
one measure, as rating companies have said in the past Finland
must also take structural reforms, including raising the
retirement age.”

Katainen also signaled last week his National Coalition
Party is willing to lower taxes that hamper job creation.

“There is only one goal to our tax reform goals: to add to
the number of jobs in Finland,” he said on March 16. “We want
to reduce taxes that discourage employment and tighten those
that aren’t so detrimental to work.”

Finland’s general government deficit, which includes
municipalities and pension funds, was 1.9 percent last year,
according to the statistics office. That shortfall is in line
with the European Union 3 percent rule, which Finland hasn’t
breached since 1996.

The government is also set to reveal new forecasts. The
Finance Ministry forecasts gross domestic product will expand
0.4 percent this year, state-owned broadcaster YLE reported on
March 19, citing people it didn’t identify. That compares with a
0.5 percent projection on Dec. 20.

“The growth outlook is weaker and the government needs to
react,” Kuoppamaeki said. “The best way would be to stimulate
the economy, which Finland can’t do, so it will have to reduce
expenditure to match lower revenue to stop the budget deficit
from widening.”